Rs 1 Lakh Emergency Withdrawal: Why its future cost can be more than Rs 1 lakh

Rs 1 Lakh Emergency Withdrawal: An emergency can force investors to dip into their investments, but withdrawing money earmarked for long-term financial goals can have a cost beyond the amount taken out.

In a conversation on Zee Business, financial expert Pankaj Mathpal, CEO of Optima Money, explained that even a Rs 1 lakh withdrawal can impact future wealth creation because the amount could otherwise have remained invested and grown over time.

The experts also stressed the importance of protecting wealth while creating it, with Vikas Puri, Senior Partner, Complete Circle Capital, highlighting the need to maintain a balance between present needs and future financial goals.

Speaking about wealth creation and wealth protection, Mathpal explained that investors should not focus only on building a corpus for future goals. They also need to prepare for unexpected financial requirements so that their long-term investments are not disturbed.

"When we talk about retirement planning or achieving future financial goals, if your money gets spent on something else in the present, that can affect your plans," Mathpal said.

He gave the example of an emergency fund. An investor may have already set financial goals and started saving towards them, but if there is no separate money available for an emergency, the investor could be forced to withdraw from those investments.

"Suppose you have decided your goals and are saving money for them. But if you don't have money for an emergency, what will happen immediately? Your entire money can go there," Mathpal said.

Mathpal stressed that investors should not look only at the amount being withdrawn. The more important consideration is the future value that the withdrawn money could have generated if it had remained invested.

"Don't think that I have withdrawn Rs 500 or Rs 1 lakh. But the much bigger value that this money could have created in the future has stopped somewhere," he said.

In other words, the financial impact of an emergency withdrawal can potentially extend beyond the immediate amount taken out. The investor also gives up the opportunity for that money to remain invested and contribute to future wealth creation.

According to Mathpal, maintaining an adequate emergency fund is an important part of financial planning. He also recommended having appropriate insurance cover so that unexpected expenses do not derail long-term financial goals.

"Always keep your emergency fund, adequate life insurance and health insurance," Mathpal said.

He added that investors should simultaneously prepare for future financial requirements, including mid-term and long-term goals and retirement planning.

Mathpal also emphasised that financial planning should begin with a clear understanding of the difference between needs and wants. He said investors should maintain a balance between their income, expenses and financial requirements rather than allowing spending to get disconnected from their earnings.

"Your expenses, your needs and your income -- there needs to be a balance between these," Mathpal said.

He added that financial planning should involve preparing for future requirements from the outset. This includes maintaining a contingency or emergency fund, having adequate insurance, setting financial goals and then investing towards those goals.

"Contingency fund, insurance -- the need for insurance -- and deciding future goals and starting investments for them," Mathpal said, while explaining the basic steps of financial planning.

According to him, investors should then consider factors such as choosing the appropriate asset class, diversifying their portfolio and maintaining patience as they work towards their financial goals.

Puri also emphasised the need to balance wealth creation with wealth protection. While explaining financial planning, Puri said investors need to prepare for both their present and future requirements.

"Always, see, the future and the present both are important. Maintaining a balance between them..." Puri said.

He explained that simply accumulating money for the future while compromising the present is not necessarily the right approach. At the same time, spending everything today without securing future needs can also create financial problems.

Puri said financial planning requires a balance between saving for future needs and spending on present requirements.

This becomes particularly relevant when an unexpected expense arises. If an investor has not kept money aside for emergencies, the amount accumulated for another financial goal could potentially have to be used instead.

The experts' comments point to an important distinction between wealth creation and wealth protection. Investing regularly can help build a corpus over the long term, but investors also need a financial cushion for situations that cannot be planned in advance.

Mathpal specifically linked this to emergency funds, insurance and future financial goals. Puri, meanwhile, stressed the broader principle of balancing present and future financial needs.

The experts' insights highlight that financial planning is not only about increasing investments but also about preparing for unexpected expenses and protecting long-term goals.

Mathpal said investors should not adopt an approach where they save everything for the future without enjoying the present. At the same time, spending everything today and leaving the future unsecured is also not appropriate.

"You cannot say that today we will keep saving and saving so that our future will be good. Both are important," he said.

Puri similarly emphasised the importance of maintaining a balance between present consumption and future savings.

For investors, this means financial planning should account for both foreseeable goals and unexpected expenses. An emergency fund can help meet immediate financial needs without necessarily requiring investors to disturb investments earmarked for retirement or other long-term goals.

A Rs 1 lakh withdrawal may solve an immediate financial problem, but Mathpal's point is that investors should also consider what that Rs 1 lakh could have become if it had remained invested.

The eventual impact will depend on factors such as the investment, time horizon and returns, so the experts does not specify a particular future loss for a Rs 1 lakh withdrawal. The key point from the expert is that the opportunity cost can be significantly larger than the amount withdrawn.

That is why maintaining an emergency fund and adequate insurance alongside goal-based investments can help investors protect the wealth they are trying to build.